New deadline could put deal on a deficit fix within reach

Friday

Jan 25, 2013 at 2:00 AM

Bloomberg News

Bloomberg News

Congressional Republicans' plan to extend the U.S. borrowing limit through May sets up yet another hair-raising deadline, complete with the threat of suspended pay for lawmakers if they fail to make the hard choices needed to fix the government's finances.

Much of the groundwork for a sound deficit-reduction deal has already been laid.

In recent deals, lawmakers have enacted spending cuts worth about $1.5 trillion over the next 10 years, and tax measures that will bring in $600 billion. That leaves only $1.2 trillion in further savings — net of interest payments — to get the federal budget deficit down to 3 percent of gross domestic product, the level needed to shrink the nation's debt over the next decade.

Finding $1.2 trillion will require tough, but not insurmountable, choices on both the spending and tax sides. In the interest of hastening a deal, here are several areas where lawmakers can look for the necessary savings.

Inauguration Day rhetoric aside, President Barack Obama has suggested he understands that the United States can't solve its fiscal problems without addressing the escalating costs of Social Security, Medicare and Medicaid. It's possible to do so without, as Obama put it Monday, choosing between "caring for the generation that built this country and investing in the generation that will build its future." Obama's own budget proposal aims to reduce Medicare spending by $360 billion over the next 10 years, including by requiring drugmakers to issue bigger rebates for beneficiaries who also qualify for Medicaid. About $28 billion could be gained by raising Medicare premiums charged to higher-income beneficiaries — a strategy that currently applies to only the 5 percent of seniors with incomes of more than $85,000 a year, or $170,000 a year for married couples.

As for Social Security, changing how the government measures the cost of living — something Obama was considering during the fiscal-cliff talks — could save $112 billion over the next decade, according to the Congressional Budget Office.

The fiscal-cliff deal promises to generate about $600 billion in new revenue by increasing marginal income-tax rates — and eliminating preferences — for the richest Americans.

By capping tax deductions, the U.S. could raise almost any amount of money — as much as $1.7 trillion over 10 years, according to the Tax Policy Center. Setting a $50,000 limit on all deductions other than charity, for example, could raise $490 billion. Such a change would have only a small impact on most taxpayers, with those in the middle income quintile seeing an average tax increase of $823 annually

The U.S. could raise an additional $13.5 billion in revenue by applying the regular income-tax rate to carried interest — the payment many investment managers receive in return for their work, currently taxed as a capital gain. Eliminating special tax breaks for the oil and gas industry could bring in $35 billion more.

To avoid the automatic, ham-handed "sequestration" of $1.1 trillion in federal spending scheduled for March 1, Congress will have to find ways to reduce duplicative and inefficient expenditures. It's possible to trim the defense budget alone by more than $500 billion without undermining U.S. military capabilities.